Greek Elections Fail to Forestall Market Carnage in Europe

Assumptions that a legacy party victory in the Greek elections would magically “calm the markets” in Europe have proven unfounded. Whatever boost the election outcome gave is gone, as investors rightly recognized that nothing had fundamentally changed: the same parties that negotiated an unsustainable situation in Greece would now manage that unsustainable situation, with no hope of success.

The potential coalition – there’s actually been no breakthrough yet – of the traditional parties on the left and right is ripe for backstabbing and general instability, and the austerity regime’s next round, which must be put into place within a month, will be incredibly unpopular and devastating to the state. Finally, while Greece collapsing may have a residual effect on other countries in the Eurozone, Greece staying in its same muddled state has no residual improving effect. Spain and Italy are much larger and remain much more pressing problems, and a non-explosion in Greece doesn’t ameliorate that.

“Greek election results are unlikely to resolve euro-zone uncertainty,” said Barclays. “Instead, the focus should shift to the June 28-29 EC summit, the likely renegotiation of the Greek austerity package, and to Spanish yields.”

Despite early signs Monday morning that markets reacted positively to the Greek election, Spanish and Italian bond yields were continuing to increase and stock market gains were beginning to ease. Dow Jones’s Martin Essex has the latest. . . .

Spain’s 10-year yield was recently 0.28 percentage point higher at 7.14%, while the corresponding Italian yield was up 0.14 percentage point at 6.07%, according to Tradeweb. Greece, Portugal and Ireland succumbed to bailouts when their government bond yields hit the 7% level. The September German bund contract was up 0.46 at 142.75.

Spanish banks were under pressure Monday as the focus shifted away from Greece—at least for now—and to other financially stressed nations, such as Spain and Italy. Banco Bilbao Vizcaya Argentaria was down while Banco Santander was also off. Adding pressure to the sector was news that bad debts held by Spanish banks rose to an 18-year high in April.

Ultimately, Greece is a victim of a poorly constructed monetary union, much as Spain and Italy are victims. Greece has its own internal problems, in particular an inability to collect taxes in their needlessly complex system. But the sudden halt of the the capital inflows that boosted Greece after the Eurozone started really ended up crushing Greece, as they could no longer compete in an elevated economy with higher inflation. It was a classic bubble situation, motivated by the euro. And the same holds all around.

Germany benefited from this for many years, selling exports to these peripheral countries with a monetary regime tailor-made for them. It will take a rollback of this, detrimental to the Germans in the immediate term, for anything to change. But as the alternative is collapse, ultimately it would be beneficial. I have little hope that the Germans see it that way.

Greek Elections Fail to Forestall Market Carnage in Europe

Assumptions that a legacy party victory in the Greek elections would magically “calm the markets” in Europe have proven unfounded. Whatever boost the election outcome gave is gone, as investors rightly recognized that nothing had fundamentally changed: the same parties that negotiated an unsustainable situation in Greece would now manage that unsustainable situation, with no hope of success.

The potential coalition – there’s actually been no breakthrough yet – of the traditional parties on the left and right is ripe for backstabbing and general instability, and the austerity regime’s next round, which must be put into place within a month, will be incredibly unpopular and devastating to the state. Finally, while Greece collapsing may have a residual effect on other countries in the Eurozone, Greece staying in its same muddled state has no residual improving effect. Spain and Italy are much larger and remain much more pressing problems, and a non-explosion in Greece doesn’t ameliorate that.

“Greek election results are unlikely to resolve euro-zone uncertainty,” said Barclays. “Instead, the focus should shift to the June 28-29 EC summit, the likely renegotiation of the Greek austerity package, and to Spanish yields.”

Despite early signs Monday morning that markets reacted positively to the Greek election, Spanish and Italian bond yields were continuing to increase and stock market gains were beginning to ease. Dow Jones’s Martin Essex has the latest. . . .

Spain’s 10-year yield was recently 0.28 percentage point higher at 7.14%, while the corresponding Italian yield was up 0.14 percentage point at 6.07%, according to Tradeweb. Greece, Portugal and Ireland succumbed to bailouts when their government bond yields hit the 7% level. The September German bund contract was up 0.46 at 142.75.

Spanish banks were under pressure Monday as the focus shifted away from Greece—at least for now—and to other financially stressed nations, such as Spain and Italy. Banco Bilbao Vizcaya Argentaria was down while Banco Santander was also off. Adding pressure to the sector was news that bad debts held by Spanish banks rose to an 18-year high in April.

Ultimately, Greece is a victim of a poorly constructed monetary union, much as Spain and Italy are victims. Greece has its own internal problems, in particular an inability to collect taxes in their needlessly complex system. But the sudden halt of the the capital inflows that boosted Greece after the Eurozone started really ended up crushing Greece, as they could no longer compete in an elevated economy with higher inflation. It was a classic bubble situation, motivated by the euro. And the same holds all around.

Germany benefited from this for many years, selling exports to these peripheral countries with a monetary regime tailor-made for them. It will take a rollback of this, detrimental to the Germans in the immediate term, for anything to change. But as the alternative is collapse, ultimately it would be beneficial. I have little hope that the Germans see it that way.